Want to know why Dry Bulk freight rates have rallied in the last month?

Last week we argued that the general trend of increasing dry bulk earnings since February 2016 is related to an improving growth rate in global industrial production. However, this alone cannot explain the sharp increases in rates witnessed lately. So, what besides the accelerating growth in industrial production have caused this sudden inflation in rates?

We would highlight the following factors:

Underlying seasonality

Coal deficit in China/globally

Increasing commodity prices/restocking

All time high U.S. grain shipments

Low fleet growth

Underlying seasonality

First of all, the underlying seasonality is that rates increase in Q4 on the back of higher coal burn in the northern hemisphere and as importing countries stock up with coal and iron ore ahead of a winter season that might impede domestic mining.

Coal deficit in China/globally

Chinese coal production has been decreasing since Q4-14 and the cuts have accelerated this year (read more here). Chinese thermal generation in the first 8 months of 2016 was on par with the same period in 2015, but in September and October thermal generation was suddenly up 12% YoY. The growth in coal burn have continued into November as coal burn from key power plants in the first 10 days of November was up 17% from the first 10 days of October and up 10% YoY. The coal shortage in China together with nuclear outages in South Korea and France together with several other factors has led to record high global trade of coal in recent months.

Increasing commodity prices/restocking

In the last couple of years’ commodity prices have been sliding steadily. This led to destocking of inventories as purchasers asked themselves: Why should I buy the raw materials today if I can get it cheaper tomorrow? This led to destocking which meant that global trade of raw materials was lower than the underlying demand. With the price increases we have witnessed in raw materials this year destocking has turned to restocking as purchasers with low inventories now are uncertain about the future price trajectory.

All time high U.S. grain shipments

The high activity in the Pacific means that there is less ballasters en-route to the Atlantic than last year. U.S. grain shipments to Pacific has been at record levels since mid-July and is currently running at all time high levels. Together with high fronthaul activity on Petcoke, Bauxite and lately also coal we have seen a drainage of tonnage in the Atlantic, which has led to surging rates within this basin.

Low fleet growth

We estimate that the YoY growth in fleet in 2016 will end at 2.4%. This is lower than last year’s 2.9% and considerably lower than the growth in the 3 prior years which on average exceed 8% p.a. Thus, in 2016 the supply growth has not been able to match the demand growth.

This site uses cookies to provide you with a more personalized service. By using this site, you agree to our use of cookies. Please read our cookie notice for more informatin on the cookies we use and how to delete or block them.OkCookie policy